Question: The following questions are used in the Kaplan CPA Review 181099

The following questions are used in the Kaplan CPA Review Course to study study share-based compensation and earnings per share while preparing for the CPA examination. Determine the response that best completes the statements or questions.
1. On January 1, 2011, Pall Corp. granted stock options to key employees for the purchase of 40,000 shares of the company's common stock at \$25 per share. The options are intended to compensate employees for the next two years. The options are exercisable within a four-year period beginning January 1, 2013, by the grantees still in the employ of the company. No options were terminated during 2011, but the company does have an experience of 4% forfeitures over the life of the stock options. The market price of the common stock was \$32 per share at the date of the grant. Pall Corp. used the binomial pricing model and estimated the fair value of each of the options at \$10. What amount should Pall charge to compensation expense for the year ended December 31, 2011?
a. \$153,600
b. \$160,000
c. \$192,000
d. \$200,000

2. On January 1, 2011, Doro Corp. granted an employee an option to purchase 3,000 shares of Doro's \$5 par value common stock at \$20 per share. The options became exercisable on December 31, 2012, after the employee completed two years of service. The options were exercised on January 10, 2013. The market prices of Doro's stock were as follows: January 1, 2011, \$30; December 31, 2012, \$50; and January 10, 2013, \$45. The Black-Scholes-Merton option pricing model estimated the value of the options at \$8 each on the grant date. For 2011, Doro should recognize compensation expense of
a. \$0
b. \$12,000
c. \$15,000
d. \$45,000

3. The following information pertains to Jet Corp.'s outstanding stock for 2011:

What is the number of shares Jet should use to calculate 2011 basic earnings per share?
a. 40,000
b. 45,000
c. 50,000
d. 54,000

4. At December 31, 2011 and 2010, Gow Corp. had 100,000 shares of common stock and 10,000 shares of 5%, \$100 par value cumulative preferred stock outstanding. No dividends were declared on either the preferred or common stock in 2011 or 2010. Net income for 2011 was \$1,000,000. For 2011, basic earnings per common share amounted to
a. \$ 5.00
b. \$ 9.50
c. \$ 9.00
d. \$10.00

5. January 1, 2011, Hage Corporation granted options to purchase 9,000 of its common shares at \$7 each. The market price of common stock was \$9 per share on March 31, 2011, and averaged \$9 per share during the quarter then ended. There was no change in the 50,000 shares of outstanding common stock during the quarter ended March 31, 2011. Net income for the quarter was \$8,268. The number of shares to be used in computing diluted earnings per share for the quarter is
a. 50,000
b. 52,000
c. 53,000
d. 59,000

6. During 2011, Moore Corp. had the following two classes of stock issued and outstanding for the entire year:
• 100,000 shares of common stock, \$1 par.
• 1,000 shares of 4% preferred stock, \$100 par, convertible share for share into common stock.

Moore's 2011 net income was \$900,000, and its income tax rate for the year was 30%. In the computation of diluted earnings per share for 2011, the amount to be used in the numerator is
a. \$896,000
b. \$898,800
c. \$900,000
d. \$901,200

7. On January 2, 2011, Lang Co. issued at par \$10,000 of 4% bonds convertible in total into 1,000 shares of Lang's common stock. No bonds were converted during 2011.

Throughout 2011, Lang had 1,000 shares of common stock outstanding. Lang's 2011 net income was \$1,000. Lang's income tax rate is 50%.

No potential common shares other than the convertible bonds were outstanding during 2011.

Lang's diluted earnings per share for 2011 would be
a. \$ .50
b. \$ .60
c. \$ .70
d. \$1.00

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